Economic times have changed since JFK

Linda McMahon, the Republican candidate for U.S. Senate in Connecticut, recently touched off a ruckus by using a 1963 speech by John F. Kennedy in a campaign ad.

In the clip, JFK argues that lowering tax rates would spur economic activity. McMahon says Kennedy thus would support the position that the Bush tax cuts of 2001 and 2003 should be extended for people at all income levels. Members of the Kennedy family and many others cried foul, arguing that if JFK were alive in the situation we face today, he would not oppose returning the rates on high-income households to their pre-2001 levels.

I don't pretend to know what Kennedy would do if alive. But we can gain some insight by examining the economic context in which he spoke and the performance of the U.S. economy before and after the tax cuts actually occurred.

Start with the situation at JFK's inauguration in January 1961. The economy was near the end of a 10-month recession. There had been two other recessions on President Dwight Eisenhower's watch, so the economy was in a slump for a combined 27 of his 96 months in office. Kennedy had attacked the Republicans on the issue of poor economic management and, issues of alleged vote-rigging aside, probably would not have won the 1960 election if not for this fortuitous recession.

Looking back, the criticism appears somewhat unfair to Eisenhower.Unemployment had been high during Ike's term, but inflation-adjusted national output grew faster than it subsequently would under Nixon or under either Bush, and not that much less than under Carter, Reagan or Clinton.

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A fiscal hawk, Eisenhower had the smallest budget deficits relative to gross domestic product of any postwar president. Furthermore, the gross national debt fell from 72 percent of GDP when he took office to 55 percent when he left, making Ike and Richard Nixon the only postwar Republicans to see that ratio fall. Ike's emphasis on sound finance motivated him to back keeping tax rates near their World War II highs even though many in his party called for cuts.

The upshot was that Kennedy entered office with the nation's finances in good shape. Yes, the debt-GDP ratio would fall further until it hit its low point of 32.6 percent at the end of the Carter Administration. But with a deficit of only 0.6 percent of GDP for the 1961 fiscal year in which JFK took the oath of office, there was room for additional spending or for tax cuts.

Kennedy himself knew little economics and did not hold strong views, relying instead on his economic advisers. These, headed by Minnesota's Walter Heller and including two future Nobelists, James Tobin and Robert Solow, were dyed-in-the-wool Keynesians.

That is, they favored increasing government spending and cutting taxes during a recession. But it also meant they wanted higher taxes and reduced spending when a recession was over.

In Kennedy's case, the economy took off. By the end of 1961, real GDP was up 6.3 percent over the prior year. For 1962 it was 4.1 percent and for 1963, 5.3 percent. Overall, inflation-adjusted output grew 16 percent over the 34 months from his inauguration to his assassination. And even at the punishingly high tax rates inherited from Truman and Eisenhower, individual income tax revenues for FY 1964 were running more than 19 percent higher when he was killed than they were in FY 1961.

There was one difficulty. While the number of people with jobs was growing faster than under Ike, the unemployment rate had dropped little. This was seen as a problem for the upcoming 1964 election. Lower tax rates were a way to give the economy a Keynesian goose. That was the situation when Kennedy made the speech featured in McMahon's campaign spot.

JFK was not effective in dealing with Congress and the "Kennedy" tax cut was actually rammed through by Lyndon Johnson after Kennedy's death. The top tax rate for individuals was cut from 91 percent in 1963 to 70 percent by 1965. The top corporate rate fell from 52 percent to 48 percent. And there was a "temporary" 10 percent tax credit for business purchases of new machinery that would last for decades.

Growth continued, averaging 5.2 percent over the eight Kennedy-Johnson years, by far the highest of any 20th-century administration. Individual income tax revenues stumbled for one year, but then continued up. Corporate tax revenues rose, without interruption, along with the economy.

But other things were happening. The federal government was spending a lot of money on interstate highway construction, military hardware, the space race and education. Much of this — especially infrastructure, science, engineering and education — boosted productivity for the overall economy. And the Federal Reserve let the money supply grow faster than it had in the 1950s. These factors all helped foster fast-growing output and, hence, growing tax revenues.

Kennedy called for a tax cut because his Keynesian aides advised him to at a time when the national debt was declining in relative terms and when budget deficits were low. No one knows what he would do now. But his advisor Tobin lived until 2002 and Solow is still living. Both were outspoken critics of the policies McMahon espouses.